the summer of Illusion

With a summer spent on trying to live on the March lows "miracle", reality is sinking in that a much larger credit crunch is looming.
By year's end many laid-off Americans will lose their benefits.
Cash for clunkers program should be renamed Clunkers print cash (to stave off depression for another quarter...)
Yet on the UNemployment range, the four-week average of claims, which smooths out fluctuations, fell by 4,750 to 566,250 last week.

 

Chinese Steel Spot price

Considering the amount of stimuli offered by the Fed, it shows that government needs to keep pumping.
That in itself shows that commodities are "toppy" and that the energy complex is about to unravel.
We sold our remaining XIU (TSE) the S&P 60. We took profits on Sunopta AND GE. Still riding Citi to unload between $5-6
Contrary to most we think the US dollar will maintain vs the Loonie so we are keeping a hefty US cash component while hedging with a gold bullion fund CEF.A
News out of Europe (Germany) is showing that GVMTs are stepping to provide credit where private banks are falling to do their jobs.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6095203/German-state-to-lend-directly-as-second-credit-crunch-looms.html

We will be buying 1/3 initial Puts on BMO as we can't really understand why their loan-loss provisions are so much lower than their competitors... We doubt they are an island unto themselves...
Meantime enjoy the last few days of relative peace as Q4 will be the show me quarter and no amount of "slow recovery" gibberish spin can damper lofty expectations already priced into the stratospheric valuations of Chinese and north American equities
CAVEAT EMPTOR

Good trading to you!

DCW

Short Squeeze day

Some of our outstanding losers, Citigroup, is coming back to life. Amazingly enough. DJIA is up 2.28% , NAZ is up 2.74%!

Amazing considering latest statistics coming out of japan:

In Japan it was reported that "."..wholesale prices fell a record 6.6 percent in the year to June, as the world's No.2 economy slides deeper into deflation"

If deflation is making markets go up, then productivity increases can`t be far behind. Whoever has a job will have to spend their cash for the rest of the unemployed (yeah right)...

Oh well enjoy it while it lasts!

You know you are in trouble when....

Good morning to all on this Monday July 13th 2009!
This week is banking releases for the big boys

Today two observations:

A)Meredith Whitney
The lady was on CNBC earlier this morning and probably the talk of the day as she raised her estimates on GS which are already 30% over street consensus. The stock hit a low of $50 now trading over $146. A bit late there on the call Mam!
Whitney also said that net tangible at BAC gave a value to the stock over $12. Making it one of the cheaper big banks out there. Yup owning a portfolio in California is really a great idea this week... NOT!
She also mentioned that Citi was a dead duck with the dilution having killed any chance of a rebound!

B)Paul Volcker
The only man in the BAM administration who can bring real reform and change is nowhere to be seen these days. This is truly a bad omen. If you let technocrats like Geithner and Bernanke to skip stones from one crisis to the next,we are in for a bigger fall! Instead the admin is bent on serving rhetoric of more legislation to plug holes in a system that does not work and only delay the inevitable.
We cannot understand why Health care reform is being pushed down the throats of legislators when the finances of the country are in such disarray. Sound to us like buying a very expensive engine when you can't afford to fill up the tank!
We strongly hope that Mr. Volcker doesn't give up and is able to convince enough idealists that NOW is the BEST time to fix the system while there is still goodwill behind the US dollar ( or is that ill will behind the Euro?)

You know when you are in trouble when analysts are bullish on stocks that have tripled off their lows and reformers are pushed aside in favor of populist rhetoric.

We are still short S&P as we expect earnings to dip 15% across the board

Good trading to you

DCW

USA = 40 Millions people without jobs

ECONOMIC REALITY
AS the graph shows, US unemployment is racing towards 10% without flinching.It is going to be tough to get these people back to work if factories are working at 2/3 of capacity. We have explained repeatedly that this economy which went from a zero savings rate now climbing to a 5-10% rate is on the mend. This will be a long and protracted process and to think that you can pick stock winners in this environment is wishful thinking.
Add to that that hourly wages are flat and there is no impetus to increased discretionary spending if not for governments unwise spending spree. The US (Germany and Italy are in the same boat) like Japan before it has to contend with an aging population. Older people always spend less. No more expense accounts, employer sponsored plans. The gravy train stops. The sooner the government learns its lesson the better for all!

FOR INVESTORS
Asset allocation and currency holdings if anything is much more important and the timing of the conversions is crucial!
We repeat out themes:
1)We have told you that oil prices were untenable. Anything over $70 was caused by banks and speculators using free cash to hoard. That was unwise and it will show up by year end as a loss fro anyone buying over $70.
2)Gold is not a refuge in a deflation era.
3)S&P short is your best asset allocation until employment stabilizes

It is foolish to listen to pundits saying that employment is a lagging indicator. In Deflationary times it is in fact a leading indicator...

Careful of Shorting Bonds

We covered all our short bonds at this point. WE are short 138% on S&P though!

While we told you on June 10 that long equities was becoming a suspect strategy, we now also think that shorting bonds is a VERY dangerous move.

We think the USD dollar can hit 1.17 vs. the Canadian. Why? The risk capital played the same game. Piling into commodities as if that was going to save the day. Was copper in such short supply? Oil back over $90 as Goldman was expounding looking for suckers?
As we have repeated many times for the last couple of months, that is not a panacea for all the troubles out there but they all point to deflation created by US monetary policy. The result is abysmal job numbers, month after month. IN FACT THERE IS NO JOB CREATION AND THE SITUATION IS GETTING WORSE. In a world where the consumer de-leverages governments can and should help induce investment not belabor the process by introducing legislation to regulate! WAKE UP! CREDIT CARDS DEFAULTS ARE DOUBLING Q/Q
Deflation, Deflation, Deflation. As long as the Fed doesn't decide to FORCE banks to loan money ( by raising rates) nothing is going to happen EITHER WAY. The day will come though. Rates will start to rise followed by a massive influx of money and inflation is just going to explode. NOBODY out there says it but the RISING of rates will CREATE inflation. WHO would have thunketh?

Meanwhile back at Medieval Camelot, King Obama and his Google eyed knights of the info-techno age are still looking at their rear view mirror and looking at a charging T-REX or Dragon, light on economic data, and relying on data points to draw feeble insights of dead green shoots (clearly though a persistent housing bust is omnipresent ) and think that lower LONG term rates is where lies their salvation. To us it looks like a money pit full on cancerous deadbeat brokers and third rates bankers but that's a story for another day!

Sorry boys, but while you are avoiding the marching T-TEX you just MISSED a giant curve and falling down a steep embankment where the T-REX will get you anyway!


So expect the dollar to rise, bonds to squeeze out the shorts and Obama to think he is doing well. He is in a no win situation vs Bernanke's reappointment!

1) If he reappoints him, Bernanke won't raise rates (extending deflationary period)
2) If he replaces him with Geithner ( he won't rise rates looking as long bonds yields as the NEW role of the fed)


BRING BACK CAPITALISM
Salvation lies probably in boutiques bank shops welcoming the real rainmakers of years past but also newly minted players of tomorrow.
What the economy needs now is for the government to STOP being the buyer of worthless equity and a salvage crew of carrion. GET OUT OF THE WAY!
RISK takers must be FREE to take risks, not regulated on pay. As long as Communists run US capital ... it's better to let sleeping dogs lie or a Chinese dragon rampage can be your next full living nightmare! YOU'VE BEEN WARNED!

We are staying short equities and LONG USD.


Good trading to ya!


DCW

Deflation... it's all down hill from here ... Just be happy it's still a W and not a flatliner

ANY ASSET DENOMINATED in USD IS TOXIC
It is so foolish to think that because the US wrote up 13 Trillion dollars of IOUs that a massive wave of inflation was coming! The planet already lost $50 trillion. Inflation is not the cause for concern, it 's deflation and countries who can't pay their debts!
People are just going to stop trading with the USA until they get their house in order and they will let rates rise until it does. The USD will rocket up while people expect it to go down.
Meantime short some mortgage institutions because 50 cents on the dollar is still not a good price. Banks are going to fail because mortgages will fail faster than the income can be generated by the interest spread. Mortgages renewals cannot be supported by the Treasury or the Fed.


COMMODITY RALLY is FOR THE BIRDS
Fools are playing the Commodity game trying to figure out what China will buy. The special du jour: Gold, Copper, Oil , Nat gas... There is no sustainable consumption numbers that justify another round of hoarding and speculation.
By the end of the year, only positions in US will show gains while EURO, HUANs, Rubles etc. will show declines...
The same happened to gold in 2007-2008... European holders got whacked holding the metal.
Why just not short US indices and avoid gyrations and tensions?


BEST BET SHORT S&P 500
Bonds are getting close to our target of 4.50-5.00%
You are better to short the S&P because 930 is a now a beacon for the shorts.

The US economy just had a modicum of recovery because inventories were seriously depleted. Don't confuse that with a recovery .. the economy will run at 60% of its heyday for quite a while... Profits will tank and we will test news lows soon enough!

We raised 50% in cash today!

Good trading to you!

DCW

Debtor Nations: NOT A GOOD BET

LAWYERS DRAFTING REGULATIONS
It's refreshing to have an administration bent on bringing change in the form of regulation to the markets. Unfortunately the outcome of most encounters are starting to show wear and tear. The fox has left the barn, guys! Law firms and lobby groups in Washington must be having a record year! With so many new regulations coming out, we are surprised only a few SEC agents have been caught doing insider trading!


TIME TO TALLY
We have winners and we have losers...


FOR NOW

Winners have been large banks supported by taxpayers on a global scale. Unfortunately this is a shell game and until assets start to transact and deals get done, balance sheets are just illusions.


The biggest losers are by far foreign holders of US bonds. They just have been destroyed in the last month and we predicted that at one point the rest would follow. Unfortunately, the massive injection of liquidity is not having the results hoped for. While banks are winning on the spread game, everybody else is losing out.
Conventional market knee jerk reaction of flight to safety from out of stock to the relative SAFETY of bonds has NOT OCCURRED. We said this would eventually happen. IT took six months longer but we have defeated valiant efforts by Chairman Bernanke and Secretary Geithner. BOTH Equity and bonds markets fell this week. Gold rallied.

THE TYPE OF NEWS TO EXPECT THE NEXT SIX MONTHS
Bbg - Kokusai Cuts Treasuries as Fukoku Sees End to Rally
May 21 (Bloomberg) -- Bond investors in Japan from Kokusai Global Sovereign Open Fund to Fukoku Mutual Life Insurance Co. are trimming their holdings of U.S. Treasuries, betting that the biggest slump in U.S. debt in 15 years will likely continue.
Kokusai Global Sovereign, Asia’s largest bond fund, reduced its bet on long-term Treasuries in March, while Nippon Life Insurance Co., Japan’s biggest life insurer, plans to focus its new purchases on yen-denominated debt, it said last month. Fukoku Mutual says it will buy yen bonds because a 10-year rally in U.S. debt will end this year.



THE PATIENT IS NOT RESPONDING

We suspect that the market which lost an aggregate of $50TB in value from July 2007 to March 9,2009 isn't really well served by the $13TB thrown at the problem by global leaders.

Unfortunately, the cost of capital is rising, deals are not getting done because banks are requiring more equity for transactions to occur and the process seems bogged down.

WHAT TO EXPECT
On the upcoming short week, it will become a more pressing matter to see what financial reporters decide "what" is news.

CALIFORNIA
We suspect that California's finances will come front and center and from there the markets will take their cues.


KEEP AWAY FROM THE US DOLLAR
In any case, the odds of the S&P going to 1k seem diminished while those of the US 10yr hitting 3.50% are now but a foregone conclusion.

As Recently as two weeks ago, pundits were suggesting that the US was going to lead the world out of recession, but the recent destruction of the USD suggest, that investors may be more keen to looking to China and other creditor nations as safer harbors in these troubled times.


Good trading to you.


DCW